Long term investors need not worry - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Long term investors need not worry 

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In this issue:
» Budget disappoints the markets
» Shiller, Buffett skeptical about recovery
» What's keeping the British PM concerned
» BRICs' a force to reckon with, agrees Obama
» ...and more!!

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"A single Budget speech cannot solve all our problems," said the Finance Minister Mr. Pranab Mukherjee as he began his speech today. And what he delivered (or didn't) was exactly what he said at the start. His budget for 2009-10 is now being seen by the media as a non-event given that the speech did not include much about the four key topics the markets were awaiting with bated breath - divestment, FDI, fuel policy, and corporate taxes.

But then, as the FM concluded his above statement, "...nor is the Union Budget the only instrument to do so," one would not be wrong in expecting that he (the FM) and his team will follow up this Budget with measures aimed to get India back on track to improved growth over the next few years.

But the stock markets did not seem to be happy as seen from the massive crash that the BSE-Sensex saw after the Budget was over. What seemingly did them in was the FM's no-stance on the key topics as mentioned above, as also the grim forecasts of the fiscal deficit that is expected to touch 6.8% of GDP in FY10, as compared to 6.2% as per provisional accounts of FY09. This level of deficit is a matter of serious concern though the FM did not talk about any real measure to reduce the same going forward.

Coming to the specifics of the Budget, while there were a whole lot of doles and grants for social sectors (and deservedly so), the scale of the same with no real announcement of a major revenue collection exercise really caught us by surprise. The finance minister also pricked some nerves by not reducing the corporate tax rate and also hiking the minimum alternate tax (MAT) from 10% to 15%.

Among key sector policies, while the budget had no real message for oil pricing, there were some scattered announcements that dealt with the government's initiatives towards improving the quality of infrastructure in both urban and rural areas. Also, while healthcare received some attention, there were no real pronouncements on the education front.

The FM also made an attempt at giving some relief to the individual taxpayer by increasing the exemption limit in personal income tax from Rs 150,000 to Rs 160,000 for all categories of individual taxpayers except women and senior citizens. For women taxpayers, the exemption limit in personal income tax has been raised from Rs 180,000 to Rs 190,000. As for senior citizens, the limit stands raised to Rs 240,000, from Rs 225,000 earlier.

All in all, the FM focused a lot on the social sectors and the 'aam aadmi' while giving a cold shoulder to corporate India, and therefore the stockmarkets.

But we at Equitymaster aren't complaining at all! After all, a budget is but an annual exercise and must not define an investor's long term investing objectives.

There is no real change in our view on stocks post the Budget announcements today. While speculators and traders might feel the pinch of today's crash that seems more like a knee-jerk reaction, long term investors need not worry at all but for a caveat that the government's rising deficit might mean higher inflation and interest rates in the medium term.

From a long tern perspective though, we maintain our faith in some Indian companies that will emerge out of the current crisis much stronger.

Anyways, an extremely disgruntled BSE-Sensex ended nearly 870 points or 5.8% lower today as the markets booed the Union Budget. Banking, realty and capital goods stocks were among the biggest losers. The FMCG sector was the only one that stood its ground in the face of all the selling pressure. While the Asian indices ended the day a mixed bag, stocks in Europe are trading weak currently.

02:39  Chart of the day
Looking at the extreme reaction of the stockmarkets today, we thought it would be interesting to see how the markets (represented by the BSE-Sensex) have historically reacted to budgets in the past. One immediately striking feature of the results is that a similar kind of reaction was seen in the markets in FY01, when they tanked the day the budget was announced.

In all probability, it's a function of the anxiety surrounding stockmarkets during a downturn that makes people react in extreme ways to budgets.

Data Source: Trend

There seems to be no consensus on whether an economic recovery has actually begun. There are those who believe that the worst is over. Others like Nassim Taleb believe that we are in the middle of a crash.

Some credible voices seem to be also of the latter view. Robert Shiller, professor of economics and finance at Yale University, says, "The problem is a lot of these green shoots that we see could easily reverse themselves. Notably confidence, we've seen a surge in confidence." Widely considered as an important figure in the field of behavioral economics, Professor Shiller should know about things like confidence. Another person who knows a thing or two about market behavior, Warren Buffett also believes "the recovery really hasn't gotten going." We'd also like to point out though, that a bad economy wouldn't stop Buffett from picking a stock if he found value.

It's not just economists and finance experts who are warning people that the slowdown is far from over. The politicians too, have joined the guessing game. And British PM, Gordon Brown is the latest addition to the list. As per Times Online, Brown has warned that the worst of the recession is yet to come and world leaders are coming in the way of a recovery.

Although the British PM has gone on record saying that he expects the UK economy to be out of the woods by end of this year, how exactly will he be able to muster enough resources for the same remains the moot question. Perhaps the G8 summit expected to be held later this week may provide a solution.

Of late a lot has been said about how China, India, Russia and Brazil are expected to grow at a faster pace going forward. The latest to join the bandwagon is the US President Barack Obama. He believes that even though US is a military superpower and the largest economy in the world, these three countries mentioned are quickly catching up and are growing at a faster rate than that in the past. And because their clout is increasing, the US is probably realising the importance of not dictating policy but instead adopting a more tolerant attitude of partnering with other countries in the world and find areas of mutual concern. Clearly, these four nations are widely touted to be a force to reckon with in the future.

04:50  Today's investing mantra
"I made a big mistake in not selling several of our larger holdings during the Great Bubble. If these stocks are fully priced now, you must wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I." - Warren Buffett
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7 Responses to "Long term investors need not worry"


Jul 7, 2009

Can you kindly give a firm definition of 'Short Term', 'Medium Term' and 'Long Term' please? You seem to use there terms loosely!


Markand Desai

Jul 6, 2009

Good analysis.If the data for how much sensex was overheated before budget day and then how much got corrected would have given correct picture.
Long term investers to worry only to the extend that jockers of buisness channels are bombbarding "his masters voice" to spread mis informations and shellow ideas.Real investor should not get trapped in it .Only is some wise publications can help poor novice investors who can contribute to growth of india by putting their hard earn money in "right equity"company contributing to Indian growth.



Jul 6, 2009

Dear Sir,
your comments are very naive, brisk, & smooth! Just keep it up.In these days when every one is yearning for a fast buck, your analysis is very refreshing indeed.
Bye bye & keep going!



Jul 6, 2009

There is a old saying - do not take any decision, when you are not firm. After taking the decision, never look back or do the post mortam. You shall end up with sleepless nights and pain the mind / heart. The Long term investors, you can, say firmly, do not absolutely have to be upset by what;s happening in the turbullant short term market, for them, " the best is yet to come".


Phani Prasad

Jul 6, 2009

As usually we have the habit of snatching Defeat from the Jaws of Victory. The Country Economic and Fiscal Policies will be held ransom to the various state elections which will be held in the next 5 years. What the country needs is a healthy dose of reforms which will open up the economy for futher competition. Let us remember that the Telecom Rates which have been lowest in the Indian History has been achieved by pragmatic regulation and healthy competition. We dont seem to hear a word about infrastructure which is the crying need of the nation. We will miss the bus of pushing large masses out of poverty and make them independant yet again. This brings an interesting question do the politicians want people to be truly economically independant. It seems to have all started with 2 Rs Rice in AP and spread like a virus across the nation the nation and effectively stealing the future of future generation of Indians. I guess as long as Indian Politicians are fighting these petty battles...the dream of India becoming a economic superpower is a myth !!!! If at all it becomes it is despite the politicians and not because of them....!!!


Gaurav Bhatia

Jul 6, 2009


Nice Wrap up of todays market but is there a need of not worrying. I dont think so. Isnt this fall similar to a fall of sensex from 21 k to 15 k i.e. 30% from peak. U.S. started falling from July'07 and we fell from January 2008. Isnt this the same cycle. We cant be de-coupled from world. Decoupling was discussed in 2007 also and now in 2009 also. I dont think that this is a right time to buy, atleast not before 12500-13000 sensex.


pradeep talikoti

Jul 6, 2009

the 5 minute wrapup was very good

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